Chinese equities strategies have been among the most volatile of all funds in the Investment Association (IA) universe, but taking on more risk has not always provided investors with better returns, according to the latest FE Trustnet study. 
Over the past five years there has been a lot of rhetoric surrounding China, with concerns over a slowdown in its growth forecasts a persistent concern.
More recently there have been issues surrounding the country’s inflated level of debt, which remains a concern.
While debt-to-GDP at around 46 per cent looks modest compared to more developed countries, much of the debt sits in state-owned enterprises, with corporate debt at 165 per cent of GDP.
Unsurprisingly, with reasons concerns over China for much of the last half-decade, the IA China/Great China sector has been the most volatile of any sector in the IA universe, as the below chart shows.
Scatter chart of risk-adjusted returns from IA sectors over 5yrs
Source: FE Analytics
Yet the country remains the engine for global growth, outpacing developed countries as GDP grew by 6.8 per cent last year – ahead of expectations – and forecasts now suggest strong growth is likely to continue through 2018 and into 2019.
“Concerns over a Chinese hard landing have faded and the fears of a slowdown which caused global market sell-offs in 2015 and 2016 have also abated,” Architas investment director Adrian Lowcock said.
Meanwhile, the country has more than $3.1trn of currency and gold reserves to deal with its debt issue and has also undertaken reforms in the financial sector.
If the debt becomes too large relative to China’s reserves then the debt burden would become increasingly unaffordable, Lowcock added, but said that currently the country can afford to support itself.
Others are more optimistic on China with Ed Smith, head of asset allocation research at Rathbones saying the country should “remain the largest Asian growth engine over the next 20 years, and should continue to command investors’ attention.”
Below we look at the funds in the IA China/Greater China sector for those investors looking to take on dedicated exposure to the country.
There has been a broad spread in the performance of funds in the sector over the last five years, as the below chart shows. Interestingly, the expectation that the higher risk funds outperform has not proven correct.
Scatter chart of risk-adjusted returns from funds over 5yrs
Source: FE Analytics
Indeed, the best performing fund over the period is the four FE Crown-rated NB China Equity run by Frank Yao and Lihui Tang.
The $1.4bn fund has returned 145.51 per cent over the last five years while it has experienced volatility of 17.98 per cent, the fifth-highest.
The fund is overweight consumer discretionary, financials, healthcare and industrials while heavily underweight technology with just a 23.7 per cent allocation versus the benchmark’s 41.13 per cent.
Another top returner is the five-crown rated Janus Henderson China Opportunities fund run by Charlie Awdry and deputy manager May Ling Wee.
The £1.2bn fund has returned 127.82 per cent over the last five years while it has also been less volatile than its average peer (15.68 per cent). As such, it has the highest Sharpe ratio – a measure of risk-adjusted returns – in the sector of 1.02.
The 38-stock portfolio’s two largest holdings are tech giants Alibaba and Tencent (9.9 and 8.1 per cent respectively), though its largest sector weighting is to financials.
At the other end of the spectrum the $681m Aberdeen Global Chinese Equity fund has been the second-lowest returner in the sector.
It has made 32.2 per cent over the last five years but has done so with the lowest volatility in the sector of 13.07 per cent.
Interestingly, the three most volatile funds – GAM Star China Equity, New Capital China Equity and Allianz China Equity – have all underperformed the MSCI China benchmark over five years.
While taking dedicated China exposure may be right for some investors, some may prefer a more diversified approach.
Jason Hollands, managing director at Tilney Group, said: “For most investors, the most appropriate way to access China will be through a broader Global Emerging Market fund or Asia ex Japan fund rather than a single-country China fund.”
Below is the list of the 11 funds with a more than 40 per cent weighting to China from the IA Global Emerging Markets and IA Asia Pacific ex Japan sectors.
Table of funds with highest weighting to China
Source: FE Analytics
All of the above funds come from the Asia Pacific ex Japan sector, with Mirae Asset Asia Great Consumer Equity the most overweight the country at 48.2 per cent, with six of its top 10 holdings from China.
The $615m fund run by Joohee An has been a top quartile performer in its sector over five years, returning 77.44 per cent – though this is lower than the return of the average fund in the IA China/Greater China sector.
In the IA Global Emerging Markets sector, Baillie Gifford Emerging Markets Growth has the highest allocation to China.
The five crown-rated fund run by Richard Sneller and Mike Gush has a 35.4 per cent weighting to the country. It has returned 72.82 per cent over the past five years – the second-best return in its sector but again below the average China-only fund.